Ban proprietary trading, curb proprietary trading in order to tame proprietary trading and its proprietary traders!
Proprietary trading or prop trading as it is usually called was at the helm of the last financial crisis in 2008. Once again it is this very form of trading activity and that has engulfed the US trading firm MF Global in the month of October 2011.
So what exactly is this proprietary trading? In simple terms it is the form of trading activity that financial institutions carry out in the world financial markets with their own money. The proprietary traders or the prop traders as they are so called speculate the movements of bonds, currencies, stocks and derivatives items. They do so by means of taking some amount of leverage activity. In no time does this speculation turns intoxicating and the prop traders go on over speculating with their firms' money. This over speculation goes hand in hand with a higher leverage activity on the side of the firm, giving it an over exposure to the systemic risk that looms at large on the world markets. When Lehman Brothers collapsed in 2008, it had a leverage of somewhere around 34. When MF Global Holdings collapsed in the month of October 2011, it was leveraged somewhere close to 40 times its actual worth. So when such firms collapse, they not just collapse themselves, but in turn they bring down the entire system with them to rubble and ashes.
I would be expressing my strong views and opinions on this topic in the coming blogs and would try to keep you updated with the news and happenings across the globe, related to this prop bomb that causes widespread systemic financial crashes and explosions !!!
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